Dallas Fed president on QE3: inflation likely, but not jobs

Federal Reserve Bank of Dallas President Richard Fisher says the central bank’s third round of bond purchases will probably not create jobs but will risk higher inflation.

“I do not see an overall argument for letting inflation rise to levels where we might scare the market," he said. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction."

Mr Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee’s decision last week to expand its holdings of long-term bonds with open-ended purchases of $US40 billion of mortgage debt every month in a new round of quantitative easing. The Fed, led by Chairman Ben Bernanke, is seeking to boost growth and reduce the 8.1 per cent unemployment rate in the US.

Congress’s inaction on fiscal policy and excessive government regulation is discouraging businesses from hiring and investing, Mr Fisher said. The Fed’s stimulus efforts, or quantitative easing, won’t work because the Fed can’t address those obstacles to growth, he said. “I question the efficacy of these large-scale asset purchases. What we are doing is not having the impact on employment."

The US economy is “growing at sub-optimal speed," though residential real estate has emerged as a bright spot recently, he said. “As we saw this morning, the housing market is on the move."

Purchases of existing houses rose 7.8 per cent to an annual rate of 4.82 million, the most since May 2010, figures from the National Association of Realtors showed yesterday.

On inflation, he said: “If you look at some of the long-term indicators, it is indicating a little nervousness. If you were to see a sustained rise, then I would start to get worried."

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.67 percentage points on September 14, a four-year high.

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Some economists, including Nobel Prize winner
Paul Krugman
, have said tolerating higher inflation could lead to an acceleration in US growth. That position has been echoed by Chicago Fed President Charles Evans, who has called for accommodation as long as unemployment remains above 7 per cent and the inflation outlook is less than 3 per cent.

“I appreciate the arguments made by Mr Krugman and others," Mr Fisher said, praising the Princeton University professor’s work on trade. If you allow higher prices, “how credible are you in clawing them back?" Mr Fisher said. “The question is, at what point do you lose credibility?" Current measures of inflation have remained under control and in line with the Fed’s 2 per cent target, he said.